Technical talk: Be cognizant of seasonal trends

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The comments below were provided by Kevin Lane of Fusion IQ.

As can be seen from the weekly S&P 500 chart, the Index finally closed above resistance (green line) and its intermediate-term downtrend line (red line). The significance of this is that on numerous occasions prices were repelled at these levels, suggesting there was still some overhead supply. However the ability of the S&P 500 to move above these levels now suggests that large overhead supply is no longer present and prices could rise as buying demand outstrips supply.

The only negative associated with the rally thus far is the declining volume (participation); however, we attribute a good portion of the decline to the typical seasonal summer slowdown in trading activity. With the current rally breaking out to new post-low highs, sentiment is surprisingly cautious and anecdotally every market newsletter author and person with an opinion are looking for a reason why prices have to correct as opposed to continue higher. As we have all seen, the market rewards the minority and confounds the majority, and currently majority opinion is still sceptical and not embracing this advance.

That said, we do recognise it is summer and historically the odds would suggest softer prices not higher ones; however, breadth has been good and the tape has good upside momentum behind it.

To balance the need for respecting the historically weak seasonal trends of the summer and still being on the right side of the tape, we suggest making sure your downside risk plan is in place in case seasonal trends do prevail against tape strength.

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Source: Kevin Lane, Fusion IQ, July 27, 2009.

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